The UK Financial Industry; There May Yet Be a Light at the End of the Tunnel

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It is no longer news that the United Kingdom’sfinancial industry has suffered a major decline in business volume over the three months leading to September;and this fall happens to be the first since July 2009. Furthermore, the industry also witnessed a drop in profitability, with financial companies reporting considerable cost increasesand employment cuts.

With this report, investors, traders, and policy makers are confused about how bad the situation actually is, and how bad it can possibly get.

However, if there is anything definite about this news, it would be the fact that a fall in financial service cannot represent good news for any market or economy.

But is there any light at the tunnel?

In its annual health check on the UK economy, the International Monetary Fund said the country’s banks need to strengthen their balance sheets “by building capital rather reducing assets”.  Despite the clarity of the institution’s advice, it is not too difficult to imagine that the banks can only satisfy the need to strengthen their balance sheets if they can reduce lending and avoid leveraging themselves any further.

With the UK household gross debt to GDP standing at the highest to be found in any G7 nation, the IMF warned that household debt remains high despite efforts to deleverage; a convincing case can therefore be made that private individuals shouldn’t necessarily be the ones to receive any available bank funding.

But where did these financial gurus get it wrong? No one will probably be able to answer this question. But the stagnation in retail banking may have solely come from the fact that the banks are now focusing more on commercial lending than consumer lending.

As Kevin Burrowes, UK banking leader at PwC pointed out,“growth in retail banking has come to a halt as the banks focus more on commercial than consumer lending. It is promising that commercial business is growing again, which reflects the banks’ increasing efforts to meet social and economic expectations by increasing their lending to businesses.”

As the lending to industrial and commercial companies increases, and the much more traditional and convenient retail banking reduces, the statistics might first be cruel, but the economy will eventually be the better for it. But the question is, when?

In his 2012 budget statement, Chancellor George Osborne presented “a deliberate strategy to create a more balanced national economy, where financial services are strong, but they are not the only string to our bow”.

Analysts believe that as long as the banks are channeling money to critical sectors like science and tech, manufacturing, aerospace, creative media, and several others, then it may not be long before the indicators finally begin to switch gears.

Till that time, what the situation deserves is clearly an applause seeing as the banks are clearly prioritizing and putting their money where the economy’s mouth is.

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